Residential landlords: is your tenant running a home business?

Since the beginning of the Century it is estimated that the number of households in the private rented sector has doubled. With rising house prices and the squeeze on social housing it is clear that the so called Generation Rent is here to stay, many such tenants being in the 20-39 age group, making up a significant proportion of the workforce today.

According to the Office for National Statistics, in 2014 (the last year for which figures are available) the number of people working from home had risen to its highest level since records began, accounting for 13.9% of the workforce, and that is sure to be a trend that will continue, facilitated by remote access via the internet, flexible working arrangements and a more mobile workforce.

So why should this worry the residential landlord? Well, residential tenancies are covered by the Housing Act 1988 (with subsequent amendments) and specifically exclude business use. There is often a clause in an Assured Shorthold Tenancy to that effect. Landlords may end residential tenancies on a no-fault basis, subject to complying with the rules. Business tenancies are covered by the Landlord and Tenant Act 1954 which does not apply to residential occupation. Business tenants often have the right to remain in possession and can even claim compensation if their tenancy does come to an end in certain circumstances. This may not be what the landlord envisaged at all.

It seems then that a tenancy must be either residential or business but that does not always reflect the reality of modern life. Thankfully, help is now at hand as the dilemma is covered by the Small Business, Enterprise and Employment Act 2015 which means that so long as the tenant still has his home there, then his/her residential tenancy status is not compromised by some business use, and the Landlord and Tenant 1954 Act regime for businesses, is excluded. It is generally accepted that the business use must not utilise more than 40% of the premises in order to maintain residential tenancy status.

The balance is achieved by recognition of a new breed of tenancy – the Home Business Tenancy.

But is it as simple as that? Not quite. As with many issues it is all a question of degree. To some extent the question a landlord has to ask himself is if his tenant is merely working from home (such as would be the case with an author, a lawyer reading a case file the evening before a day in court or a tradesman calculating a quotation), in which case there should be little problem, or running a business in the more readily understood sense (such as a beautician seeing clients for treatment, a mechanic repairing vehicles or a trader stocking a product for sale (which may raise issues).

Other issues to consider include:

• Is planning permission required? The local planners will be interested in the impact of increased traffic of customer’s and parking, delivery vehicles and their manoeuvres  and the possible nuisance to neighbours;
• Will business rates apply? Ultimately that should be the tenants problem but the authorities may come knocking on the landlords door first if business rates are unpaid;
• Should the rent be increased to reflect the additional use?
• You will need to check if the landlord’s insurance for the property is still valid;
• If the rent is calculated to include energy usage then you need to bear in mind that this could  increase significantly with business use;
• You will need to check that a home business tenancy does not breach the terms of any mortgage.

So is this more trouble than its worth for the landlord? If the tenancy agreement is properly drafted then a home business tenancy should work out well for both landlord and tenant. If your tenant asks for a home business tenancy you cannot reasonably refuse (as commentators believe that to do so could breach Competition and Markets Authority guidance on unfair terms in a tenancy agreement) unless:-

• The landlord would have to change the mortgage to permit this;
• The tenant’s business is of a type that could cause significant wear and tear to the property: or
• It is likely that a nuisance to neighbours would be caused.

Andrew Morley provides dispute resolution and residential landlord and tenant services from our Lincoln office, to contact him please click here.